Dim days for Ujjwala

High international prices ring death knell for the LPG scheme

In August 2019, Jairam Ramesh, Congress leader, former Union minister, and MP, made a startling observation. Speaking at a book launch, he said not everything about Narendra Modi could be demonised. On the Pradhan Mantri Ujjwala Yojana (PMUY), which enabled subsidised gas cylinders to women, he said: “In 2019, all of us in the political discourse made fun of one or two of his programmes, but it has turned out in all electoral studies that the PMUY is one single programme which has been able to connect him with crores and crores of women and given him the political traction which he didn’t have in 2014 … Now if we are going to run this down and say this is all hocus pocus and say these are wrong numbers, we are not going to confront this guy.”

The PMUY scheme offers deposit-free LPG connections to needy households. These connections are in the name of the women members of the families. The cost of the connection and the first free full cylinder (roughly ~1,600) were supposed to be recovered by oil companies through subsidies accrued on the purchase of cylinders by PMUY recipients at full prices.

The scheme had issues from the start and PMUY recipients complained they could not afford to refill the cylinders at full prices. To sweeten the deal, the Centre waived the recovery of upfront amounts.

Cut to 2020. International fuel prices were at their lowest point ever. Crude oil even entered negative territory for a day in April last year. Taking advantage of the fall in global crude oil prices, the Centre quietly did away with LPG subsidies from May 2020. Domestic LPG in April 2020 cost ~581 in Delhi. Today it is ~859.50 apiece and there is no subsidy on LPG, barring a marginal one on freight to cooking gas consumers in the country. This amounts to less than ~30 a domestic (14.2 kg) cylinder in most cases.

Sector watchers say budgetary allocations for LPG subsidy may soon vanish, going the way of kerosene subsidy in the Budget 2021. This will mean that consumers will bear the full price of a domestic cylinder even if it is over ~1,000 apiece. The Modi government can keep prices under some check by issuing verbal (informal and always unwritten) diktats to public sector oil companies on prices, like it does on petrol and diesel prices. But the burden of keeping LPG affordable will shift to the oil companies instead of the Union Budget, freeing up much fiscal room for the Centre. “A call on whether to resume LPG subsidy is a political decision, and will be taken by the Ministry of Finance,” a government official said.

This is a stark deviation from the record high crude oil prices that the Manmohan Singh regime had to face. While the previous government played around with the finances, curtailed prices, even issued bonds to be paid by future regimes, it did ensure that the consumer did not bear the full brunt of international price volatility. This government seems unfazed by such responsibilities as it holds back LPG subsidies and quietly keeps getting consumers to pay the full price.

How will the government offset the political impact of retiring a highly popular scheme? One option is to make gas cylinders free for the PMUY beneficiaries, as was done during the first pandemic wave. This benefits over 80 million households, and is likely to see runaway success in poll-bound states, especially Uttar Pradesh.

According to the Uttar Pradesh government, there are 14.7 million PMUY consumers in the state, the highest in India. Chief Minister Yogi Adityanath himself oversaw the disbursement of some PMUY connections recently.

But the scheme cannot be replicated for one simple reason: A subsidised (free) gas cylinder is a one-time deal. For a refill, customers will have to pay the prevailing market price. This means low-income families could face an unpredictable hit and be vulnerable to fluctuations in the international oil prices.

For the moment, the government seems to be content with monitoring LPG consumption for any signs of a dip. But sector watchers say if the prices rise too high, consumers will simply stop buying LPG. Urban consumers who are accustomed to LPG and have no choice will keep paying market-linked prices. But rural consumers have other options — they could go back to using firewood or other biomass-based cooking-fuels. Electric cooking too can be an alternative for urban consumers in cities like Delhi, where it is cheaper than LPG, but adoption has been so slow that oil companies do not see it as a threat.

Either way, high international prices could ring the death-knell of a scheme that was instrumental in returning the BJP to power in 2019.

One option is to make gas cylinders free for the PMUY beneficiaries, as was done during the first Covid wave. This benefits over 80 million households